Startup share scheme gets tweak

Policy

Employee shares: Changes to make it more attractive to top talent

The government’s attempt to woo small businesses and startups with proposed changes to the employee share scheme has received a lukewarm reaction, with industry concerns the changes don’t go far enough.

Treasurer Josh Frydenberg said on Tuesday that government would double the limit for employee share scheme options to $10,000 for unlisted companies, with an aim to “help employers attract, retain and motivate employees and grow their businesses”.

A further exemption for startups and small businesses would be introduced to allow them to sidestep reporting requirements and disclosures. The government has yet to release a consultation paper or draft legislation for the changes.

The employee share scheme is popular with early-stage startups, allowing them to offer employees shares in the company as a way to compete in terms of salary with larger companies, and to let its workers to have a stake in the company.

The changes are needed to streamline the current system, which were introduced by the Coalition in 2014, Mr Frydenberg said.

“The current regulatory framework is too complex and fragmented and ultimately discourages businesses – particularly small businesses – from offering employee share schemes,” Mr Frydenberg said in the statement.

“By doing so, the attractiveness of employee share schemes to employers will improve. This initiative is particularly important for startups in early stages of growth.”

Under the proposed changes, the employee share scheme limit would increase from $5000 to $10,000 per worker per year.

A dedicated exemption would also be created from disclosure, licensing, advertising and on-sale obligations under the Corporations Act, and the scheme would be expanded to include contribution plans, where an employee can make a monetary contribution to eligible financial products.

The changes allow a startup to offer employee share schemes without having to publicly disclose “commercial sensitive financial information”, unless they are otherwise obligated to do so.

Industry group StartupAus has been pushing for changes to the employee share scheme for several years now, but its key recommendations have not been adopted by the government.

Last year’s Crossroads report said that two fundamental changes could help the scheme reach its full potential. The organisation said that the 20/12 rule – where a company must issue a disclosure document if it offers shares to more than 20 investors in a 12 month period – meant that many startups were likely to fall foul of the investor ceiling and be required to produce “burdensome” documents.

“This substantially limits the usefulness of the ESS regime for many of Australia’s most promising startups, particularly those that are growing their workforce rapidly,” the StartupAus report said.

StartupAus chief executive Alex McCauley said the organisation would lobbying government for these further changes through the consultation process.

“It’s a good opportunity for the community to have a say in how to make this a genuinely world-best practice equity share scheme for employers,” Mr McCauley told InnovationAus.com.

“This is an opportunity for the sector to have a conversation with Treasury about how to make this work really well for startups and that’s something we welcome.”

The employee share scheme is a crucial one for Australian startups, he said.

“It’s one of those things that doesn’t cost any money, and it’s a genuine pain point for startups. It’s not something that companies are going to succeed or fail over, but it will increase the ability of Australian businesses to attract great talent.”

BlueChilli founder Sebastien Eckersley-Maslin said more needs to be done to improve the scheme.

“The changes are welcomed and are an important step in the right direction. I do fear that they don’t go far enough however, particularly the cap,” Mr Eckersley-Maslin told InnovationAus.com.

“Granting options to employees is a key recruitment and retention method for startups who otherwise may not be able to compete with the salaries offered by traditional organisations.”

“The gap, or difference in remuneration, however, is much greater than $10,000 so the problem may still be present even with these changes.”

Along with changes to how employees who receive shares are classified, StartupAus would also be campaigning for an increase to the $50 million in turnover limit for the startup exemption.

The government’s changes are long-awaited, and follow consultations in late 2016 after the launch of the National Innovation and Science Agenda.

The Coalition’s changes to the scheme resolve a situation where the options were taxed at the time of issue rather than when they received the proceeds, available to companies less than 10 years old with turnover of less than $50 million.

It also seems unlikely that the proposed changes will be legislated before next year’s election, with a consultation process still to come.

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